What is a reserve currency?
So this is something we're going to keep covering over the next few months, an occasional series. Let's call it Pax Americana, about that post-war balance that had put the U.S. at the center of the economic solar system and how that might be changing.
Today in the show, a story about a potentially interesting question. Is the US dollar's reign ending? If so, what will replace it? And what does that mean for the yous and mees around the world?
So a reserve currency is one that countries around the world hold in reserve in the vaults of their central banks and in bank accounts of their central banks. They can hold any currency or they can hold some of this and some of that. The idea is they need to keep their trillions of money somewhere safe to store value until the day when they need to spend it.
And they store other countries money because they have a lot of their own and their own currencies are not always that stable. Having other currencies gives them a buffer.
One way a central bank stores another currency is by buying that country's debt. Because for all intents and purposes, if you're holding U.S. treasuries, you're holding dollars. Same for Japanese government debt. You're holding Japanese yen, etc.
And there's one currency that central banks store more than any other currency. The U.S. dollar. To understand why, we called Ishwar Prasad, a professor at Cornell University.
Thank you for joining me today.
Of course, I'm glad the timing worked out. And this is one of my pet subjects, so it's good.
Currencies are his thing. Because Ishwar spent 17 years at the International Monetary Fund, which lends dollars to developing economies. So a lot of his life has been watching dollars flow all around the world. And he has seen the dollar's dominance on a more micro level. Like sometimes when he's been traveling, he has found himself without the local currency.
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